A U.S manufacturing company operating in an LDC(less developmentcompany) shows t
ID: 2661555 • Letter: A
Question
A U.S manufacturing company operating in an LDC(less developmentcompany) shows the following resultsUS LDC
Sales(units) 100,000 20,000
Labor(hours) 20,000 15,000
Raw Material(currency) $20,000 FC 20,000
Capital Equipment(hours) 60,000 5,000
calculate partial labor and capital productivity figures for theparent and subsidiary. Do the result seem misleading?
Compute the multifactor productivity figures for labor and capitaltogether.Are the results better?
Calculate new material productivity figures (units$ where $1=FC10). Explain why these figures might be greater in thesubsidiary.
Explanation / Answer
Partial producitivity figures: Parent Partial labor productivity = 100000 / 20000 = 5 Capital productivity = 100000 / 60000 = 1.667 Subsidiary Partial labor productivity = 20000 / 15000 = 1.333 Capital productivity = 20000 / 5000 = 4 These results seem misleading because the subsidiary in the LDCuses much more labor relative to capital in order to produce acorresponding amount of output. This is due to the cheaper cost oflabor in the LDC. Multifactor productivity: Parent 100000 / (20000 + 60000) = 1.25 Subsidiary 20000 / (15000 + 5000) = 1 These results are more reasonable because it takes into accountboth inputs involved in producing the outputs, especially given thecomparative advantage in the LDC of cheaper labor relative tocapital equipment. Material productivity figures (in USD): Parent 100000 / 20000 = 5 Subsidiary 20000 / (20000 / 10) = 10 The material productivity figure is higher in the subsidiarybecause the raw materials are relatively cheaper in the LDC giventhe favorable foreign exchange rate. This is typically the casewhen LDCs export raw materials to more developed countries forprocessing.
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